Under current rules established by Her Majesty’s Revenue & Customs (HMRC) in 2011, councils are exempt from paying value added tax on commercial waste collections.
The exemption was highlighted as a ‘useful selling point’ by the Waste & Resources Action Programme earlier this year, and a potential revenue stream in the current ‘tough climate’ for local government (see letsrecycle.com story).
But North East-based recycling firm Max Recycle – a brand of the Durham Company Ltd – submitted an application for a Judicial Review earlier this month (December 5) contesting the rule, arguing it is in breach of EU competition law.
Disadvantage
The company argues that most businesses prefer to receive a service free of VAT as they otherwise suffer a ‘cash flow disadvantage’, which instantly creates an uneven playing field.
And other customers such as hospitals, independent schools or charities whose activities are not ‘100% taxable’ can only recover a small percentage, if any, of the VAT charged to them.
This also puts the private sector at a competitive disadvantage and means it must charge lower prices in order to cover itself that part of the VAT that the customer is unable to recover, according to the firm.
Max Recycle estimates that it needs to be able to undercut council prices by around 17% in order to have ‘any real chance’ of attracting the business of a customer unable to recover VAT.
Therefore, if a local authority charged £10,000 a year for commercial waste services – the company claims it would need to charge £8,333 in order to match that price in terms of actual cost to the customer.
According to the Durham Company, HMRC wrote to the firm on November 25 2014 stating that it had ‘completed’ a review of the VAT exemption. However, HMRC did not divulge the outcome to the company.
State Aid
But the Durham Company argues that HMRC is conferring ‘unlawful State Aid’ on councils, which is prohibited under Articles 107 and 108 of the Treaty of the Functioning of the European Union.
Under this ruling, the company claims HMRC ‘does not have any discretion’ as to whether it takes action or not, as “it is incumbent on national courts to determine whether or not unlawful State Aid has been, or is being provided, and to make binding orders against national authorities requiring them to desist from granting unlawful aid”.
The company also claims HMRC is contravening Article 13(1) of the Principal VAT Directive – which requires that the VAT Exemption not give rise to ‘significant’ distortion of competition. The relevant principles were laid out in Isle of Wight – CJEU judgement in 2008.
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If its Judicial Review is granted and upheld by the courts, Max Recycle claims local authorities could be required to pay an estimated 20% of commercial waste collection revenues since the exemption was launched in 2011, plus any reclaims made on the basis VAT ought not to have been levied prior to the HMRC ruling.
The counsel draft states: “The Claimant has repeatedly raised its concerns regarding the unlawfulness of the VAT Exemption, both directly and through a Member of Parliament. In doing so, the Claimant has provided the relevant officials in Her Majesty’s revenue and Customs with evidence of the distortion of competition being caused by the VAT Exemption.
“Despite such evidence, the Defendants have failed to take prompt and decisive action to bring the VAT Exemption (or purported VAT Exemption) to an end.”
Application
In a counsel draft of the Judicial Review application, the firm states that it is seeking;
– A declaration that the VAT Exemption granted to local authorities on their supplies of commercial waste services is contrary to Article 13(1) of the Principal VAT Directive;
– A declaration that the VAT Exemption is contrary to Articles 107 and 108 of the TFEU;
– An order requiring the Defendants to cease to permit or make available the VAT Exemption;
– An order requiring the Defendants to assess and recover from the relevant local authorities the amounts of unlawful State Aid received by them.
In a letter written to councils in 2011, HMRC said it had based its decision to exempt local authorities from VAT under Section 45(1) of the Environmental Protection Act 1990 – which places a duty on waste collection authorities to collect waste from commercial premises if requested by the by the occupier of the premises. The body created a ‘special legal regime’ in order to make it a non-business service.
When contacted by letsrecycle.com, a spokesperson for HMRC said: “Until a decision has been taken as to whether the judicial review will be granted, it would not be appropriate for HMRC to offer any comment.”
The Environmental Services Association welcomed the submission of the Judicial Review, arguing local authorities had enjoyed a price advantage ‘for far too long’.
ESA economist Jacob Hayler said: “Many local authorities have taken the opportunity of VAT-free services to aggressively expand their commercial waste businesses in direct competition with the private operators which have to charge VAT to their customers. This is wrong and needs to be addressed.
“ESA is carefully examining the evidence that local authorities’ VAT exemption is distorting the market so that we can work with HMRC to end this anomaly. The separate application for a Judicial Review last week will hopefully help to now bring this matter to a speedy conclusion, as authorities have been enjoying a price advantage in the market for far too long.”
LGA
According to the application, the Local Government Association (LGA) is confirmed as an ‘interested party’ in the case, but declined to comment at the current time.
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